UK large-cap equities have demonstrated resilience in tough times – and they may be poised to do so again. But could upcoming policy changes and potential rate cuts create new opportunities? asks Jo Rands, Portfolio Manager, Martin Currie part of Franklin Templeton.
The global economic landscape remains uncertain, with concerns around the Trump presidency sparking fears of tariffs, higher inflation, and stagnation. The UK has felt these pressures acutely, but within this volatility, UK large-cap equities remain a source of stability.
While stagflation – slowing growth and persistent inflation – looms as a risk, there’s a paradox at play. A weaker global economic outlook could bring inflation down, giving central banks room to cut interest rates. This, in turn, could create a more supportive environment for equities through 2025 and beyond.
Why UK large caps hold firm
In this environment, a stronger US dollar would be a tailwind for many UK large-cap companies, which generate around 80% of their revenues from overseas markets. This global exposure is a key reason why the FTSE 100 has historically remained resilient in times of uncertainty.
The index also leans defensive, with strong representation from essential industries such as pharmaceuticals, food, and beverages—sectors that maintain steady demand regardless of economic conditions.
Commodities play a crucial role as well. Oil, gas, and mining stocks tend to benefit from inflationary pressures, while banks have capitalised on rising interest rates, helping the FTSE 100 outperform during periods of market stress.
Multi-sector opportunities
Even amid ongoing macro uncertainty, certain areas within UK large caps present compelling opportunities. Take consumer staples, for example – companies like Unilever are sharpening their focus on efficiency and growth, leveraging their strong brand portfolios. The defensive nature of household goods ensures a degree of earnings stability, even in volatile times.
Meanwhile, the tobacco sector, despite long-term volume declines, continues to generate strong profitability. Pricing power, strategic diversification into vaping, and consistent share buybacks have helped sustain returns. Banks, too, are seeing a shift. Institutions like Barclays are benefiting from a more normalised interest rate environment, which supports both dividend payouts and capital returns.
Then there’s the UK consumer. With real wage growth improving and the prospect of lower interest rates on the horizon, consumer spending could strengthen, offering a boost to businesses with a domestic focus.
Pension reform: A potential game-changer
Despite the strengths of UK large caps, the asset class remains underappreciated, with investors favouring US markets and the high-flying tech stocks of the Magnificent 7. But what could draw capital back to UK blue chips? One overlooked catalyst is pension reform.
Defined benefit pension schemes currently hold a £160bn surplus, much of which remains restricted from broader equity investments. Proposed government changes could ease these constraints, creating a significant new source of demand for UK stocks.
Historically, UK pension funds and insurers were major holders of domestic equities, owning over 50% of the market in the 1990s—a figure that has since fallen below 5%. Unlocking pension capital could help reverse years of outflows and drive a long-awaited re-rating of UK equities.
Looking ahead
While uncertainty persists, the UK large-cap market continues to offer a compelling mix of defensive earnings, global exposure, and potential structural tailwinds. If interest rates start to decline and pension reforms take hold, UK equities could see renewed investor interest, setting the stage for a stronger 2025 and beyond.
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